Wall St guru forecasts 'double-dip' US slump

The US economy will confound expectations of an early recovery by relapsing into a 'double-dip' recession, says a leading New York economist.

Stephen Roach, chief economist at Morgan Stanley, believes consensus opinion is 'in denial' about America's real prospects. 'The denial is deepest when it comes to assessing both the behaviour and the perceptions of the US economy. The American consumer is at the top of that list,' he says.

The double-dip - a relapse into negative growth just as the economy begins to grow again - has been a feature of five of the last six US recessions.

Roach believes the fundamental reason behind previous second dips are present now. They are companies' failure to run down stocks sufficiently and a fall in demand. The resilience of consumer demand in the last quarter was caused by extraordinary measures, such as zero-interest loans to finance car sales and aggressive discounting by retailers, he says.

'We estimate that real personal consumption expenditures surged at around a 4.5 per cent annualised rate in the last quarter. By contrast, over the 28 recession quarters since the late Fifties, this has averaged a mere 0.4 per cent. The spending burst of late 2001 was literally 10 times as rapid as the recession norm. Never before have consumers stretched this far in the depths of recession.

'If that's not denial, I don't know what is.'

Stock markets are in denial, too: 'Tech stocks are still priced for five-year earnings growth of 34 per cent - an outcome never achieved in history,' says Roach. 'Recovery will be hard to come by until the denial finally cracks.'